Netflix (NFLX) Squeeze Provides Lessons in Shorting

The market is holding well near multi-year highs this morning with no real market-moving news on the table. The big announcement this morning came from the White House, where President Obama disclosed a $3.73T budget with a record $1.65T budget including the negotiated tax-cut agreement.

Netflix Streams to Dizzying Heights

We are seeing eye-popping strength from media pioneer Netflix, Inc. (NFLX), which is up more than 6% today. NFLX is a controversial because it carries a lofty valuation: a P/E in excess of 80 and a PEG ratio of 1.63, indicating its fast growth still does not justify the current price. The stock has been consistently the strongest in the market over the last few years, and continues to stream-roll the stubborn army of shorts.

That army lost one of its major generals last week when Whitney Tilson covered his ill-fated short position. After Neflix’s most recent blowout quarter, Tilson changed his investment thesis on the stock based on the fact they have overcome most of his concerns. Investors are either following suit based on Tilson’s reversal, or performing similar analysis. When a company has such a large net float short, the squeeze can be ferocious like we are seeing today. You don’t short based on fundamentals alone, the technicals should always take precedent when shorting. Netflix, in my opinion, will one day come crashing back to a more reasonable valuation once competitors provide more viable entrants into the space, but I will not be touching this stock on either side for now.

In an uptrending market, active traders like to look for stocks that have recently reported strong earnings, gapped up and held. Marc Sperling last week highlighted Netflix as a stock fitting that description. From February 7:

Netflix, Inc. (NFLX) is a perfect example of this phenomenon. The company had another strong report, gapped up and based for five days before a continuation move on Friday. Sperling feels the stock still has significant upside, with still a large short interest set to get squeezed.

Casino Dog

MGM Resorts International (MGM) was the last of the big three casinos to report earnings, and is trading down around 4% after the company reported a greater than expected Q4 loss due to a one-time tax adjustment. Wynn Resorts Limited (WYNN) remains the clear cut leader in the group, while Las Vegas Sands Corp (LVS) remains in its tight long term wedge pattern after a disappointing report.

Agricultural Group Remains Strong

Agricultural stocks continue to push higher as more investors seemingly take note of the sector’s strong fundamental story. When The Mosaic Company (MOS) fell hard following the announcement that Cargill would be selling its 64% stake in the company, I highlighted a great opportunity to buy the dip. PotashCorp./Saskatechewan (POT), up 4% today, remains our favorite in the group controlling 20% of the world’s potash supply, but we also like others like Agrium, Inc. (AGU), MOS, and CF Industries Holdings, Inc. (CF).

Gold and Silver Nearing Another Big Move

Sperling also feels that gold and silver are close to making another potent move. Silver continues to outperform gold, and is close to all-time highs once again, while gold is close to breaking out of a week long base. The measured move for SPDR Gold Trust ETF (GLD) would see it get back to the $136 area, but we like it to get back to highs this year.

Disclosure: John Darsie is long POT, MOS, WYNN, GLD, SLV. Scott Redler is long GLD

About John Darsie 46 Articles

John Darsie is the Business Editor of

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1 Comment on Netflix (NFLX) Squeeze Provides Lessons in Shorting

  1. I bought NetFlix the day I heard Blockbuster filed for bankruptcy and I couldn’t be happier.

    “Netflix, in my opinion, will one day come crashing back to a more reasonable valuation once competitors provide more viable entrants into the space, but I will not be touching this stock on either side for now.”

    Who knows how long that will take, but in the interim, here’s something to think about.

    As of this moment, Netflix has NO competition. Amazon…they’re trying but they can’t get it together, Blockbuster…tried and failed, iTunes…Not in the same category, Vudu….Who?, Hulu…Subscription with commercials…No thanks.

    NetFlix is the ONLY and best positioned company to accomplish this feat. They have the most market penetration with nearly every consumer Internet enabled device accounted for; Televisions, Blu-Ray Players, Mobile devices; laptops, cell phones, tablets, Home media streaming devices like AppleTv, Netgear, Roku, Western Digital, Seagate…..I could go on and on. NetFlix is becoming so ubiquitous that manufacturers have begun including dedicated NetFlix buttons on their remote controls. I don’t see any other companies who are more entrenched with this type of content delivery with a subscription based service.

    If as an investor you are worried about studios renewing their contracts with NetFlix, I wouldn’t be too concerned. Studios like Netflix because they can deliver(stream) content without having to worry about copyright issues, DRM, boxed media and the hordes of illegal downloaders. Having a streaming service means that you can view all this content at will thus negating the need to pirate movies. It’s a win-win for both parties.

    I guess we shall see what the coming year has to offer.

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